Equity analysts at National Bank Financial revealed their “2023 Dividend All-Stars” portfolio on Tuesday aimed at investors “seeking stable, predictable, elevated income.”
The list consists of 16 of the firm’s favourite yield ideas, sharing three investment criteria: “1. Dividend/distribution yield of approximately 5 per cent or greater; 2. Low risk of the current payout proving unsustainable / dividends ideally growing; and 3. Generally positive bias regarding the prospects of the company and/or share price.”
“NBF’s Dividend All-Stars portfolio for 2022 (initially published on February 15, 2022) returned income of 5.4 per cent and realized an average price return of negative 8.3 per cent over the last 12 months for a total return of negative 2.9 per cent versus the S&P/TSX Composite’s negative 1.3 per cent over the same period (3.0-per-cent income & negative 4.3-per-cent price for the index). This portfolio return assumes investors keep dividends/distributions as income and re-invest capital gains at the mid-year update; however, assuming that income is also reinvested would have resulted in a portfolio total return of negative 3.0 per cent.”
While the 2022 list did not outperform the broader index, the analysts emphasized the portfolio has garnered an average total return since inception of 11.6 per cent versus the S&P/TSX at 8.6 per cent.
“Similarly, NBF’s Dividend All-Stars’ cumulative return since its inception has been 294 per cent versus the index at 235 per cent,” they said.
“We expect the overall outperformance to continue due to 1) investor interest for high yield names; 2) conservative payout ratios implying sustainable yields; 3) high average payout measure (AFFO, FCF, EPS, etc.) yield that indicates room for dividend increases; and 4) positive analyst outlook for names in the portfolio.”
By sector, the 2023 list is:
Pipeline/Utilities/Energy
* Capital Power Corp. (CPX-T) with an “outperform” rating and $53 target. The average on the Street is $52.35.
Analyst Patrick Kenny: “For 2023, we expect Alberta power prices to remain heightened in the $150 per megawatt hour neighbourhood after averaging more than $160/MWh through 2022. For 2024, merchant Alberta power contributions represent approximately 55 per cent of cash flows, including the repowering of Genesee Units 1 & 2 and the merchant portion of its Alberta renewable assets (Halkirk II, Clydesdale Solar). Meanwhile, the company looks to continue developing its portfolio of contracted renewables, primarily in the U.S., while bidding $450-$500-million worth of capacity expansions into the Ontario market.”
* Keyera Corp. (KEY-T) with an “outperform” rating and $35 target. Average: $34.47.
Mr. Kenny: “KEY remains focused on the completion of its $1.0-billion (net) Key Access Pipeline System (ISD: Q1/23) while ramping up contracted throughput through 2024, and when combined with the recent $365 mln acquisition of a 21-per-cent minority interest in the flagship KFS facility, we forecast 10-per-cent growth in AFFO [adjusted funds from operations] per share for 2024. Meanwhile, we highlight available whitespace at the G&P level (only 55 per cent of its Montney capacity under volume commitments), providing robust operating leverage to increasing drilling activity through the year. Normalizing for Marketing contributions, we forecast 6-per-cent growth across its fee-based cash flows through 2025. Combined with D/EBITDA of 2.9 times for 2024e, moving into KEY’s long-term targeted range of 2.5 times to 3.0 times, we expect a return to dividend growth in 2024, and forecast a 6-per-cent increase for Q1/24.”
* Secure Energy Services Inc. (SES-T) with an “outperform” rating and $10 target. Average: $10.50.
Mr. Kenny: “With the initial $75-million of cost-saving synergies from the Tervita merger now fully realized, and significant operating leverage to robust near-term drilling activity, we forecast the company achieving its absolute debt target level of $850-$950-million by Q2/24 with D/EBITDA trending below 1.0 times by the end of the year, well under its long-term leverage target of below 2.0 times, implying the potential for an accelerated return of capital strategy to shareholders through H2/23e (i.e., share buybacks, dividend increase). Additionally, we expect tailwinds to the E&FM segment from regulatory mandates, including the AER’s annual reclamation spending requirement (4-5 per cent of non-producing wells annually) as well as the similarly structured provincial government-approved program in Saskatchewan. Overall, we forecast 2026 AFFO per share of $1.34, representing a free cash flow yield of more than 16 per cent and a five-year AFFO/sh CAGR [compound annual growth rate] of more than 15 per cent.”
* Topaz Energy Corp. (TPZ-T) with an “outperform” rating and $30 target. Average: $28.90.
Dan Payne: “Recent results continued to highlight the value of its portfolio, significantly resulting from its resilience and diversification; TPZ is poised for 11.8-per-cent agg. free cash yield on leverage of 0.7 times while trading at 8.7 times 2023 estimated EV/EBITDA, versus the midstream peers at 8.4 per cent on leverage of 3.1 times while trading at 10.3 times and the royalty peers at 11.1 per cent on leverage of 0.2 times while trading at 8.5 times”
Household Products
* KP Tissue Inc. (KPT-T) with a “sector perform” and $10 target. Average: $10.17.
Zachary Evershed: “With well-recognized brands (e.g., Scotties, Cashmere and SpongeTowels) and long-standing relationships with major retailers, KPLP has the largest market share in bathroom (33 per cent plus) and facial tissue (36 per cent plus), as well as being #2 in paper towels (23 per cent plus) in Canada.”
Communication Services
* Telus Corp. (T-T) with an “outperform” rating and $30 target. Average: $31.57.
Adam Shine: “Telus has enjoyed a premium valuation to its peers given its verticalization strategy in Wireline as a point of differentiation and relatively less competition faced out West which could soon change if Rogers and Quebecor are able to close their respective purchases of Shaw and Freedom. After the successful IPO of Telus International, we await future monetization opportunities related to Health and Agriculture which could happen over the next two or more years. Telus continues to execute well and has completed its fibre build after two years of accelerated capex spending. FCF is poised to jump in 2023 and coming benefits from copper decommissioning will be realized along with other savings ($200-$300-million) and LifeWorks synergies ($200-million, two-thirds related to revenue) over the next 3-5 years.”
Real Estate
* Allied Properties REIT (AP.UN-T) with an “outperform” rating and $31.25 target. Average: $35.65.
Matt Kornack: “Allied owns one of the premier real estate portfolios in Canada with core urban exposure, unique architectural attributes and density potential. The distinctiveness of its office offering draws a variety of tenants and is scarce given Canada’s recent population boom and limited heritage structures relative to other North American markets.”
* Choice Properties REIT (CHP.UN-T) with a “sector perform” rating and $15 target. Average: $15.53.
Tal Woolley: “Choice offers an attractive yield (5.1 per cent) for one of Canada’s largest and most liquid REITs. It also has a manageable payout ratio of 84 per cent, based on our 2024E AFFO/u estimates.”
* CT REIT (CRT.UN-T) with an “outperform” rating and $17.50 target. Average: $17.25.
Mr. Woolley: “CRT has the best balance sheet amongst the retail REITs (6.8 times D/EBITDA vs. the peer average of 9 times). This provides further risk mitigation in a retail sector potentially facing a recessionary environment. A well capitalized balance sheet coupled with by a 68-per-cent 2024 estimated AFFO payout ratio, results in CRT units currently yielding an attractive 5.5 per cent. CRT has de minimus refinancing activity to complete through 2023/2024.”
* Dream Industrial REIT (DIR.UN-T) with an “outperform” rating and $15.50 target. Average: $15.23.
Mr. Kornack: “Dream IR offers investors a 5-per-cent yield at a payout ratio of under 90 per cent. Including expansionary capex and DRIP participation the company generates positive free cash flow. Improving operating fundamentals on the back of global industrial real estate strength, almost full occupancy and expanding rent spreads will drive higher organic growth and eventually justify consistent distribution increases once critical mass is achieved. The REIT has been able to regularly pursue growth initiatives and despite a more-challenged capital market backdrop of late, DIR continued to scale its portfolio via partnership with the GIC Sovereign Wealth Fund for development projects in the GTA and the acquisition of Summit II REIT.”
* Dream Residential REIT (DRR.U-T) with an “outperform” rating and US$10.50 target. Average: US$11.25.
Mr. Kornack: “The cost of owning and constructing a home in DRR’s markets has increased, impacting homeownership prospects for the lower-to-middle income households living in the Sunbelt states. DRR offers an affordable alternative (19-per-cent rent to income levels) for a growing cohort of the population with a unique type of product (garden suites) that is difficult to replicate in new supply given land and building costs. Additionally, DRR’s capital allocation strategy generates outsized rent growth on a cost-effective basis.”
Financials
* Alaris Equity Partners Income Trust (AD.UN-T) with an “outperform” rating and $21 target. Average: $21.09. Average: $21.08.
Mr. Evershed: “We remain confident in Alaris’s ability to deploy capital and expect the company to ramp up investments following a slower 2022. Given the attractive return to target on quite conservative assumptions, we rate Alaris Outperform.”
* IGM Financial Inc. (IGM-T) with an “outperform” rating and $48 target. Average: $45.63.
Jaeme Gloyn: “IGM offers an attractive 5.4-per-cent dividend yield compared to the Canadian peer group average at 4.4 per cent, global peers at 5.0 per cent and other Canadian largecap financials at 4.5 per cent. Although IGM paused dividend increases considering increased investments and expenses to grow the business, management remains committed to growing the dividend over time alongside earnings. Management is targeting a payout ratio of 60 per cent of adjusted cash earnings (currently at 73 per cent) to consider a dividend hike.”
Commerical and Professional Services
* Dexterra Group Inc. (DXT-T) with an “outperform” rating and $10 target. Average: $8.20.
Zachary Evershed: “DXT is well positioned for sustained organic growth exiting the pandemic as all three segments benefit from catalysts. Without counting on unannounced M&A, we foresee 16% top-line organic growth as DXT emerges from the pandemic on the back of commercial, aviation and retail end market recoveries.”
Transportation
* Exchange Income Corp. (EIF-T) with an “outperform” rating and $67 target. Average: $62.18.
Cameron Doerksen: “EIC management has guided for 2023 EBITDA of $510-540 million, up from an expected $435-445 million in 2022. For the company’s Aviation businesses visibility on this growth is solid, supported by an ongoing trend to a full passenger recovery in the company’s Legacy Airlines, new government aerial surveillance contract wins, and a recovery in aircraft leasing at the Regional One subsidiary. We also expect y/y growth in the Manufacturing segment as EIC will benefit from a full year contribution from Northern Mat & Bridge (acquired in mid-2022), and a return to growth at the Quest Windows subsidiary, which is sitting on a record backlog.”
Pharmaceuticals
* DRI Healthcare Trust (DHT.U-T) with an “outperform” rating and US$9.75 target. Average:
Endri Leno: “DRI Healthcare invests in revenue-based pharmaceutical royalties with a portfolio of royalty streams on 16 (main) products. The portfolio is focused on eight medically necessary therapeutic areas and is reasonably well-diversified with no single product accounting for more than 25 per cent of royalty receipts”
David Leeder